Displaying items by tag: private credit

Last year, real estate transactions declined by 50%, while cap rates increased by 80 basis points. Many sellers were unwilling to let go of properties at lower prices, while buyers contended with a higher cost of capital and macroeconomic uncertainties. Another headwind was that many banks pulled back from lending due to balance sheet concerns, following the regional banking crisis.

This year, KKR is forecasting that real estate transactions will pick up, and there will be many opportunities for investors. Additionally, private real estate investors are well-positioned to step into the vacuum and provide financing for high-quality real estate at attractive terms. 

KKR notes some catalysts that should result in transaction volume increasing. The firm believes that real estate values are near a bottom especially as the Fed is at the end of its hiking cycle and looking to cut in the coming months. 

It also notes that REITs are a leading indicator for private real estate and have already embarked on a robust rally. Further, many real estate private equity funds have ample cash and have been on the sidelines for the last year and a half. Finally, many owners and operators will be forced to sell given that many loans are due to be refinanced in the coming years. In total, $1.6 trillion of real estate debt will be maturing in the next 3 years. 

Finsum: Over the last 18 months, activity in real estate has plummeted. KKR believes that we are close to a bottom. It sees attractive opportunities for private real estate investors especially given that many loans will need to be refinanced in the coming years in addition to an improvement in macroeconomic conditions.

2023 was a unique year as nearly every asset rallied due to positive news on inflation, an economy that remained resilient, and expectations that the Fed is ready to pivot on monetary policy. Looking ahead, 2024 is certainly going to be more challenging for equities and fixed income.

JPMorgan believes that investors should have exposure to private market as they offer steady returns and can increase diversification. The bank notes that private equity has outperformed public markets over multi-year periods regardless of economic conditions. The asset class has recently faced headwinds due to interest rates increasing the cost of capital. It recommends focusing on private equity funds that less leveraged and focused on higher-quality companies with durable growth characteristics.

While the monetary environment poses some challenges, it also creates opportunities for investors to lock in attractive yields in private credit. Commensurately, many banks have pulled back from lending, following the regional banking crisis, while public market debt issuance has also been constrained. Private credit has stepped into the vacuum to provide capital for these borrowers while also structuring loans to provide more protection in the event of a default. The bank notes attractive opportunities in commercial real estate, floating rate debt, and leveraged loans.

Finsum: JPMorgan anticipates more volatility and a more challenging environment in 2024 than last year. It sees upside in alternative investments to boost returns and diversification.

Many asset managers are increasingly confident that private real estate is at or very close to the bottom of its cycle and presenting an opportunity for outsized returns. It’s a major shift from last year when many funds had to put limits on redemptions. This year, institutional investors are increasing allocations in anticipation of an improving macro environment.

Additionally, many believe that concerns about commercial real estate are exaggerated. Other than the office sector, most segments have strong fundamentals. Recently, deal volume has improved as sellers have come down on price. Overall, it’s estimated that prices are down on average by 18.5% from the peak.

Over the last decade, private real estate in the US generated annual returns of 6.4%. According to James Corl, the head of private real estate at Cohen & Steers, returns will average between 10% and 12% in 2024 and 2025. He added that returns in private real estate are highest a year after the Fed stops tightening. 

Many investors are anticipating attractive deals in the coming months as there could be several forced sellers with many borrowers needing to refinance at higher rates. Over the next 2 years, $1.2 trillion of commercial real estate loans will mature. At the end of the year, it was estimated that about $85.5 billion of this debt was distressed. 

Finsum: Asset managers are increasingly bullish on private real estate. History shows that the asset class generates outsized returns in the periods that follow the end of a Fed tightening cycle. 

Pacific Investment Management Co. (PIMCO) has been quite pessimistic on private credit and sees major downside if rates don’t fall as expected. This is contrary to many in the industry embracing private credit like Blackstone and Apollo Global. 

In contrast, PIMCO is looking to take advantage of the crisis that it’s forecasting. It also has larger implications for the economy and markets given that private credit has taken the bulk of risky lending which used to come from investment banks. 

PIMCO’s thesis rests on the US economy slowing in 2024 and a hard landing in Europe and the UK. If the economy remains resilient, then rates are unlikely to fall as much as expected. This would put stress on private markets where there is less transparency and price discovery. The firm believes that many borrowers are quite risky and quite exposed to a decline in revenues. They believe that about a quarter of private credit portfolios could face difficulties if rates don’t fall or are less than expected. 

PIMCO spies an opportunity if private lenders face pressure from its creditors based on portfolio values dropping. This would allow PIMCO to squeeze out other lenders by buying into debt at a discount. It would also continue a trend of the firm moving away from its roots of fixed income investing and increasingly into alternative assets. This segment has grown from $32 billion in 2016 to $170 billion in the first half of 2023. 

Finsum: PIMCO is bearish on private credit due to concerns about balance sheet risk with risky borrowers, bearishness on the economy in 2024, and the market pre-emptively pricing in a dovish Fed.

Cohen & Steers believes that 2024 will mark a turnaround in private real estate following years of being plagued by issues like a drop in office occupancies and high interest rates. The firm emphasizes that real estate remains a cyclical business with many indications that we are near a trough in the cycle. It acknowledges that some pain is still coming as large amounts of debt will mature in the next couple of years and require refinancing, likely leading to more defaults and distressed assets. 

However, this will present an attractive opportunity for investors according to Cohen & Steers. The firm sees private real estate following the same trajectory as public REITs, lower prices in the interim before a gradual recovery as the Fed shifts to cutting rates later in the year. 

The firm favors newer properties in the sunbelt over older properties in coastal markets. It sees migration out of high-cost cities and into the suburbs continuing, facilitated by technology and remote work opportunities. 

In terms of various segments, it sees less opportunity in Industrial properties due to high prices and indications of a supply glut and lower occupancy levels. It sees office properties as continuing to struggle given unfavorable secular trends. Specifically, it recommends staying away from older office properties which were built for a different time and workforce.

Finsum: Cohen & Steers believes that private real estate is near the bottom, and that buyers at these levels will be rewarded in the long-term.